It's been a rocky year for Ulta Beauty (ULTA -0.46%). The beauty products retailer and spa operator posted lower sales for 2020 as traffic at its stores stayed depressed through the first stages of the pandemic. In the wake of that rough period, CEO Mary Dillon in March announced she would step down from that leadership role in June.
Better days could be ahead, though, beginning with Ulta's upcoming fiscal first-quarter earnings report. That announcement, slated for Thursday, May 27, should show a sharp rebound compared to how the company fared during the COVID-19 shutdowns a year earlier.
But investors have a few other concerns heading into that operating update. Here are three trends to pay attention to when the company reports earnings.
1. The health of the makeup industry
For the February-through-April period, Ulta is likely to post a head-turning sales growth number -- most analysts who follow the stock have forecast a revenue spike of nearly 40% year over year to $1.6 billion. Sales were only down modestly year over year in the prior quarter. But that's still a low bar to clear, given how far revenue slumped in 2020's fiscal first quarter due to widespread store closings during the early lockdown phase of the pandemic in the U.S. Ulta would need over $1.74 billion in sales to post growth compared to its fiscal 2019 Q1 result.
The bigger question is whether the makeup industry is still reeling from COVID-19's impact. Executives were cautiously optimistic in mid-March that a rebound was building as customers re-engaged with Ulta's spa services and makeup products. "Beauty enthusiasts still value the human connection," incoming CEO Dave Kimbell told investors. We might see some support for that argument in rising customer traffic numbers for fiscal Q1. For context, traffic fell 12% through January.
2. Inventory challenges
The silver lining in last quarter's report was that Ulta managed to slim down its inventory of slow-moving products in struggling niches like makeup and hair treatments. Dillon said success on that front gave the chain a strong foundation upon which to build for the fiscal year ahead when the company might benefit from rising demand for premium products and have less of a need to engage in promotional price cutting.
Positive outcomes on that front would show up in Ulta's operating margin, which fell to 10% of sales last quarter from 12.5% a year earlier. Management is predicting a modest profitability rebound in 2021, but it still may take a few years before the company's operating margin returns to the 12%-plus levels shareholders saw in 2019.
3. A strategic pivot
Ulta's growth plan has changed dramatically over the last two years. The retailer scrapped its plans to expand into Canada, and it recently adopted a strategy of putting more of its emphasis on e-commerce and developing its partnership with Target (TGT -0.73%) rather than on aggressively adding to its own store count.
That shift could pay off for investors if Ulta can grow its customer base without the risks and expenses associated with launching more standalone stores. Yet it's also possible that the retailer is limiting its sales potential with a game plan that will make it harder for the chain to capitalize on any demand surge that might hit the makeup industry in late 2021 and beyond.
Next week's quarterly report won't settle that question, but investors should be watching for signs that Ulta's new strategy is succeeding. If the chain doubles down on initiatives like its digital sales channel and the Target partnership, then the business could return to setting revenue records, perhaps as soon as late 2021. But if it announces another strategic pivot, that would imply Ulta still hasn't found an approach that can deliver sustainable sales and earnings growth in a tough retail market.